fciwomenswrestling.com femcompetitor.com article, credit pexels.com Moose Photos
February 3, 2019,
Signs, signs, everywhere a sign.
No, not that kind of sign. That one is simply written, usually in really big letters and easy to understand because the creator of that sign usually wants you to get the point and get it very quickly.
Or else.
It is the other kind of sign that troubles us.
It is not printed in big letters.
As a common person with a job, mortgage, dogs, cats, maybe a parakeet, drinking buddies, Social Media interests who are not who they say they are and car payments, along with credit card debt that you pretend not to think about at your favorite coffee shop where you are paying $5 for a cup of coffee; when you don’t remotely understand a financial instrument that is sweeping the nation, run by people that you’ve never heard of and it involves risky debt, it is a sign that it may be a massive financial time bomb that we should all be aware of.
Before it explodes and drags many of us down with it.
Those are the signs that greatly concern us and probably should concern you too.
As the expression goes, there are people that make things happen, people who watch things happen and the rest of us who don’t know what the heck just happened.
When it comes to the possible collapse of the collateralized loan obligation industry, if it does happen, we sense that most of us fall into the last category.
Please finish your coffee.
Let’s talk.
You know what a collateralized loan obligation is right? Can you define it?
That’s what we thought.
Let’s do that now.
Collateralized loan obligations (CLOs) are a form of securitization where payments from multiple middle sized and large business loans are pooled together and passed on to different classes of owners in various tranches. A CLO is a type of collateralized debt obligation.
Now that is the official definition and you know what?
We’re more confused now than before we read it. We need more help. Just one second. We’re scanning for an appropriate name. Okay here we go.
At investopedia.com they explain, “A collateralized loan obligation (CLO) is a single security backed by a pool of debt. Often these are corporate loans that have a low credit rating, or leveraged buyouts made by a private equity firm to take a controlling interest in an existing company. Collateralized loan obligations are similar to collateralized mortgage obligations (CMOs), except that the underlying debt is of a different type and character (companies’ loans instead of mortgages).”
Okay now we are starting to understand it a little more.
The reason behind the creation of CLOs was to increase the supply of willing business lenders, so as to lower the price (interest costs) of loans to businesses and to allow banks more often to immediately sell loans to external investor/lenders so as to facilitate the lending of money to business clients and earn fees with little to no risk to themselves.
What caught our attention in the first place is that many of the companies that bring this product to market are run by female bosses.
Intriguing.
According to a February 2, 2019 Wall Street Journal article, women are fueling the growth of one of the most popular products on Wall Street, the $700 billion market for collateralized loan obligations and one out every four bosses is a woman.
The global financial market hopes that they continue to do well especially when you look at what type of big money names are involved in propping it up.
As reported on September 5, 2018 at Bloomberg News, “Buyers have included affiliates of the Pritzker family, Bill and Melinda Gates, and the family office of Seattle Seahawks owner Paul Allen, who co-founded Microsoft Corp. with Gates. The Huizenga family behind the Waste Management Inc. empire as well as Iconiq Capital, which invests on behalf of wealthy clients including Facebook Inc. co-founder Mark Zuckerberg, have both had CLO exposure in their portfolios at some point. The Anschutz family, led by Los Angeles Lakers co-owner Philip Anschutz, is another player.”
That prickled our attention even more.
From low-profile executives to prominent banks like Credit Suisse Group AG, a host of participants are getting rich off of CLOs. Fees linked to the industry topped $10 billion in 2018 alone, according to calculations by Bloomberg.
The concern is that they’ve fueled a rapid buildup in corporate debt that some think could become the epicenter of the next major credit crisis.
The presence of the powerful and super rich players in these deals underscores the widening demand for CLOs, a three-letter acronym that’s inspired great fear and fervor in the debt markets.
Those who favor them point to CLOs’ potential for double-digit returns and resilience to rising interest rates.
They also have a nice track record and low defaults through last decade’s financial crisis.
Those who are concerned have raised questions about whether the fast and furious pace of sales is spurring reckless behavior just as the prospect of an economic downturn looms over an increasingly highly leveraged corporate America.
Who is employed in various levels of corporate America with cats, dogs, parakeets, car payments and credit card debt?
When asked to be interviewed by the media, virtually all of the investor’s Wealth Managers either declined to comment or didn’t respond to requests for comment.
Silence often speaks the loudest.
Investment in this industry is helping fuel growth in the U.S. CLO market, which had some $540 billion in deals outstanding at mid-year 2018, up from about $250 billion in 2008.
That’s right, bah, bah, bah, billion.
So with that much money circling the drain, some wondered if a canary flew out of the cave when news of Ms. Lynn Tilton’s financial distress hit the electronic papers.
Lynn G. Tilton is an American businesswoman and collateralized loan obligation (CLO) creator, owner and manager.
She is the chief executive officer and sole principal of Patriarch Partners, LLC and its affiliated entities, a holding company managing 75 companies. She worked for Goldman, Sachs and Merrill Lynch as an investment banker.
Speaking of Ms. Tilton, on March 15, 2018, Forbes posted, “When the New York financier placed the funds into bankruptcy this week, she brought a series of lawsuits over the ownership of those companies to a screeching halt, thanks to the automatic litigation stay afforded to debtors who file for Chapter 11 protection. Her goal, as outlined in court papers, is to sell or refinance those companies to pay off Zohar’s creditors, who are owed around $2.4 billion.”
In March 2015, the U.S. Securities and Exchange Commission (SEC) charged Ms. Tilton with defrauding her collateralized loan obligation (CLO) investors.
She then filed a lawsuit against the SEC on April 1, 2015, to stop the SEC from pursuing the charges against her. On September 27, 2017, an SEC judge dismissed the charges against her.
In June 2016, an article in The New York Times attributed the collapse of TransCare, a provider of ambulance services, directly to her group.
Well, this news could be the tip of the proverbial CLO iceberg.
Like the shady sub-prime lending market caught so many of us off guard during the massive US housing meltdown, this time it might be a good idea for all of us to do a little more research on CLOs, especially if the company that you work for might be involved in one.
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OPENING PHOTO credit pexels.com Moose Photos
https://www.wsj.com/articles/women-claim-new-turf-on-wall-street-11549108800
https://en.wikipedia.org/wiki/Collateralized_loan_obligation
https://www.investopedia.com/terms/c/clo.asp
https://en.wikipedia.org/wiki/Lynn_Tilton
https://www.bloomberg.com/graphics/2018-collateralized-loan-obligations/
